WASHINGTON Feb 5 Investors that have bid up the
preferred and common shares of government-controlled Fannie Mae
and Freddie Mac are starting to get louder.
Leading the charge: consumer advocate Ralph Nader, a
shareholder in the two companies who has aligned himself with
some unlikely bed-fellows, including hedge funds.
The groups are mounting a push to ensure that any decision
on the future of the two taxpayer-owned mortgage finance giants
helps shareholders salvage some of their money.
President Barack Obama and Democrats and Republicans in
Congress want to wind down Fannie Mae and Freddie Mac. But the
effort is unlikely to break a political log-jam that threatens
to put the reform effort out of reach - at least during the
current administration's remaining years in office.
Fannie and Freddie, now making record profits, are expected
soon to make taxpayers whole on their bailouts, dampening the
urgency for Congress tackle housing finance reform legislation.
"Housing reform will have an impact not just on
shareholders, but on industry stakeholders and the broader
economy," Nader said at a round table discussion in Washington
as part of his campaign with Shareholder Respect, a group
created to empower Fannie and Freddie shareholders.
Fannie and Freddie, which own or guarantee 60 percent of all
U.S. home loans, were taken over by the government in 2008.
Shareholder dividends were suspended and the duo, or so-called
government-sponsored enterprises, are not allowed to rebuild
The firms sweep most profits as dividends back to the
Treasury on the government's 80 percent stake in them.
Several hedge funds, including Perry Capital and Bruce
Berkowitz's mutual fund Fairholme Fund, bought preferred stock
of Fannie and Freddie cheaply and have filed lawsuits seeking to
overturn the bailout agreement. The hope is the firms will
eventually be able to buy their way out of government control.
Perry Capital maintains the decision by the Treasury to
require Fannie and Freddie to sweep their profits to the
government as dividend payments is an overreach that is "plainly
unlawful," according to Theodore Olson of Gibson, Dunn &
Crutcher LLP, a former U.S. solicitor general who represents
"This deal has proven extraordinary lucrative for the
federal government," said Olson. He admits it will take a long
time to win in the courts, and there is still hope Congress and
the White House will act before judges alter the landscape.
Fannie and Freddie shareholders, mainly those who own
preferred stock with a face value of $33 billion, want to share
in any profits that exceed the amount of the government's
capital injections into the firms.
So far, no Republican or Democrat has supported the
argument, and it has not won over the Obama administration.
Lawsuits also align investors with nonprofit groups that
want a piece of the Fannie and Freddie bounty. For them, the
issue is how much Fannie and Freddie can give back to low-income
housing trust funds now that they are making profits.
Fannie Mae and Freddie Mac have taken $187.5 billion in U.S.
aid since the government takeover. They have since paid about
$185.2 billion in dividends to the government, thanks to a surge
in the U.S. housing market.
Congress had created two housing trust funds to build a
revenue source for low-income housing using part of Fannie and
Freddie's profits. But the Federal Housing Finance Agency, the
companies' regulator, suspended payments into the funds in 2008,
after the government seized the companies as mortgage losses
"The suspension was supposed to be made temporary, which
implies it is supposed to be revisited," said Sheila Crowley,
president of the National Low Income Housing Coalition, whose
organization is a plaintiff in a lawsuit against the regulator.
The group, which aims to provide subsidies to rehabilitate
and fund low-income housing, is seeking to force Fannie Mae and
Freddie Mac to resume payments into the trust fund.
Crowley said the circumstances that prompted the FHFA to
suspend those payments no longer apply since the payments would
not add to the total cost of the government's bailout.
Litigation is expected to drag out to 2019 or later.
Even if the two companies' dividend payments were to exceed
the amounts borrowed from the government in the future, the
companies would still owe money, because the bailout does not
have a mechanism for a buy-back of the government-held preferred